On any other day, it might be the dominant story. In the US, we have been seeing what happens to big companies and investment banks when there’s a complete loss of confidence. But Russia is showing us what happens to entire countries when mistrust sets in.
Russia’s Micex Stock Exchange and RTS Exchange suspended trading on Wednesday for a second consecutive day as shares, bonds and mutual funds plunged, the finance ministry rushed to provide loans to the country’s banking system and KIT Finance, a large Russian brokerage/investment bank sought to sell a stake in itself to meet financial commitments amid rumours of impending bankruptcy.
Business daily Vedomosti on Wednesday quoted KIT sources saying the investment bank was in talks with (as yet unnamed) investors to take a stake, reports Dow Jones, and also reported that KIT had failed to settle repo obligations worth R6-8bn ($235-$313bn) with around 15 counteragents, among which were Nomos Bank, Svyaz-Bank Merrill Lynch, Renaissance Capital, Alfa Bank and UralSib.
While the government insisted there was no systemic crisis, Bloomberg reports that the Russian finance ministry pledged Wednesday to lend 1.13 trillion rubles ($44bn) for more than three months to boost liquidity in the banking system.
That followed efforts by Russia’s central bank on Tuesday to shore up the financial system, injecting a record $14.16bn in one-day funds into the money market, reports the FT. The finance ministry also placed an additional R150bn in one-month deposits into the banking system.
Konstantin Korishchenko, central bank deputy governor, told Russian news agencies that the bank and the finance ministry could provide $117.6bn in liquidity to the banking sector.
But market players said margin calls forced domestic traders to liquidate positions, banks were ceasing to lend to second and third-tier companies and brokers were pulling credit lines. Meanwhile, interbank money market rates climbed to 11 per cent, their highest since a mini-banking crisis in summer 2004.
“We’re in completely uncharted territory where the prevailing emotion is of fear and numbness,” said Chris Weafer, chief strategist at Uralsib investment bank, told the FT. “No one knows where this could stop.”
The share trading suspension followed the steepest one-day fall in stocks in more than a decade on Tuesday, as stocks plunged as much as 20 per cent amid a sharp slide in oil prices and difficult conditions in money markets which triggered a rush to sell equities, noted the FT.
The problems were exacerbated by KIT’s earlier failure to meet some payments related to repo agreements, which brokers said had heightened counterparty risk and further reduced liquidity. KIT Tuesday confirmed rumours it had been unable to make payment on a series of short-term loans and said it was in talks with investors to sell a stake.
As Andrei Sharonov, managing director of Troika Dialog, the Moscow investment bank, and a former deputy economic minister, told the FT: “This is a vicious circle…It is a situation of total mistrust. The liquidity crisis is being caused by a crisis of confidence in which people are frightened to borrow and frightened to lend.”
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